Interview with Raghuram Rajan

Interesting throughout. Thanks to Mark Thoma for the pointer. I agree with much of Rajan says, so I want to highlight the sentence with which I agree the least. On the role of government in the housing market, he says

I think finding ways to slowly disengage the government in a way that you have a smooth change in prices would be a good thing.

I think that when you have bad government policy, "slowly disengage" is a recipe for perpetual crisis. When I was interviewed last night, the last question I was asked was about President Reagan. He defied those who argued for only "slowly" deregulating oil prices. The rapid deregulation worked much better.

I think that the same would be true in housing. If we got rid of all of the mortgage modification programs and mortgage subsidy programs tomorrow, the total pain involved would be far, far less than what we are inflicting on ourselves by trying to minimize the adjustment in the housing market.

Comments and Sharing

I think that when you have bad government policy, "slowly disengage" is a recipe for perpetual crisis. When I was interviewed last night, the last question I was asked was about President Reagan. He defied those who argued for only "slowly" deregulating oil prices. The rapid deregulation worked much better.

Is this true for all cases? I think it depends. Some people says fast reform is like "ripping the band-aid off quickly, instead of slowly."

But many observers think that "shock therapy" in post-Soviet Russia is what soured them on capitalism. (And, boy, are they sour!) Sometimes, the order of reform is very important. For instance, in Iraq and Palestine, George W. Bush worked hard to get elections FAST. Palestine elected Hamas to rule Gaza and the imposition of elections in Iraq in 2005 did not stop the violence on the ground from getting worse. If they were slower on democracy and concentrated on simple security, things would have worked better.

Here's an example from America today. Consider illegal drugs. A pure and radical libertarian solution to the Drug War would be "End it tomorrow."

A more "Civil Societarian" solution would point out that we have, as a society, undermined the spontaneous order institutions (church, charity, family, stigma) that would deal with the "core" of the drug problem. They would say that, therefore, we cannot simply legalize drugs now. We should start with the least harmful drugs--that impose the fewest/smallest externalities--and simultaneously try to restore the civil society solutions/resources we previously relied on.

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